Pawn Shop Stock a Timing Matter

I own shares in a pawn shop company, EZCorp (EZPW). That might be enough to make some people question my morality, and others my timing.

I will leave the moral question aside for the moment. It mostly comes down to whether the interest rates on payday loans and pawn loans are excessive or exploitative. That is a question that can be addressed by state or national regulation.

The timing question is more -- well, timely. At a moment when the U.S. economy seems to be in an accelerating recovery, it might seem out of step to buy shares in a business that is associated with hard times.

Apparently, someone forgot to tell EZCorp this piece of bad news. The Austin, Texas, company posted a record profit last year, even though the economic recovery in the U.S. was in its fourth year. Of course, it's a slow economic recovery, and many people are still struggling. But the pawn business also has moved upscale a bit from its old grimy days.

EZCorp isn't limited to the U.S. It owns 180 pawn shops in Mexico, and owns 60% of Crediamigo, a Mexican payday lender. It has 70 locations in Canada. It also owns 30% of Albemarle & Bond Holdings Plc, a British pawnbroker with more than 200 stores.

EZCorp has about 850 locations in the U.S. It conducts business under the names EZPawn and Value Pawn & Jewelry for pawn shops, and EZMoney for payday lending.

In the past five years, EZCorp. has increased its earnings at about a 22% annual clip. Analysts foresee about a 10% dip this fiscal year (which ended in September), and then record earnings again in fiscal 2014.

The valuations are deep in the value zone. EZCorp shares sell for 9x earnings and 1.0x revenue.

One reason the stock is cheap is that investors fear that regulators, especially the new Consumer Financial Protection Bureau, will clamp down or put in place new, onerous regulations. Richard Cordray, the bureau's head, said that some new regulations on payday loans are likely. He hinted that repeated use of such loans, with snowballing debt, is a special concern. In my view, though, the CFPC is likely to be reasonable in its approach to regulation.

If I'm right, then the fears of harsher regulation are creating a very good buying opportunity in EZCorp shares.